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The open banking revolution - can it take off?

You’ve decided to dump the bank you’ve been with most of your life. A current account offered by a rival – perhaps with a cheaper overdraft, better rewards or helpful budgeting tools – looks enticing online.

What next?

Until this weekend it would have taken up to seven working days to switch – account details, direct debits, standing orders and all. You may have needed to troop down to a branch of the rival bank armed with a wad of transaction statements.

This faff is one of the reasons Britons are statistically more likely to get divorced than switch banks.

Open Banking, the new rules designed to usher in a digital revolution that came into force yesterday, is meant to change all that.

Under the reforms, customers are given the keys to their own financial data, enabling them to change providers in minutes with a few simple clicks. Consumers will be in control – data will only be transferred to another lender if the person gives explicit permission when they want to take up a better offer elsewhere.

Challenger banks and start-ups hope the reforms will break the dominance of Britain’s big five lenders – RBS, Lloyds, Barclays, HSBC and Santander.

Open banking will eventually be extended to credit cardsCredit: Rui Vieira/PA Wire

But there are reasons to be sceptical. Consumers have serious privacy and security concerns about sharing financial data, while large incumbents have reason to be quietly confident that habitual UK consumers will not all rush to switch at once.

Imran Gulamhuseinwala, trustee of the Open Banking group charged with implementing the rules, has to persuade people it’s worth it.

“Consumers can take back control of their data,” he says. “They should see a real benefit from this. We know they’re not getting a good enough deal on products like overdrafts and savings accounts.”

A Competition and Markets Authority (CMA) study two years ago found just 3pc of UK current account customers change provider in any given year, despite the potential to save up to £92 annually.

Gulamhuseinwala believes Open Banking should drive tangible benefits like lower overdraft charges and higher interest rates on savings accounts. He argues it also holds “real potential” for SMEs, who he says could get more help with bookkeeping, accounts and faster access to loans.

While digital upheaval has turned many parts of the UK economy upside down – from high street retail to the music industry – it has largely spared Britain’s big banks.

The same four – RBS, Lloyds, Barclays and HSBC – still dominate, while their nearest challenger, Spanish giant Santander, owes its market share not to digital disruption, but to the takeovers of Abbey, Bradford & Bingley and Alliance & Leicester.

Contrast that with high street retail, where the likes of Amazon and Asos have changed the face of shopping.

The CMA is the body ultimately behind the Open Banking changes. The regulator is enforcing the rules on nine of the UK’s largest lenders in the hope it will boost competition.

However, last month it emerged five of these – HSBC, Barclays, RBS, Santander and Bank of Ireland – will miss next month’s deadline.

They were granted more time to fully comply, from a few extra weeks to several months. But they could face steep fines if they fail to meet these agreed extensions.

The reforms are expected to break up the dominance of Britain's big high street banksCredit: Chris Ratcliffe/Bloomberg

The remaining four – Lloyds, Nationwide, Allied Irish Bank and Danske – were due to launch on time yesterday. Other smaller lenders have voluntarily signed up.

“It’s a rolling start, not a big bang launch,” says Gulamhuseinwala. “The majority of coverage will be in place and we’ll continue to roll it out.”

This will be built out from current accounts and payments to include credit cards, e-wallets, direct debits, standing orders and international payments over the next 18 months.

The big five are not sitting ducks as they have been investing heavily in their online and mobile offerings.

So opinion varies on how disruptive the changes will prove. Jake Morgan, a senior analyst at Forrester specialising in digital banking, is one of those predicting big change.

“If data is the new oil, payment data is the best quality oil out there,” Morgan says. “It stands to reason a host of new providers will want in.”

Among those expected to capitalise are challenger banks like Clydesdale and Yorkshire Banking Group (CYBG), nimble digital start-ups like Monzo and Starling, and even overseas banks targeting a chunk of the UK’s retail banking market such as Dutch lender ING’s digital arm Yolt.

Fraser Ingram, director of innovation at CYBG, says the lender’s digital banking brand “B” is partnering with start-ups to develop better mobile apps that help customers manage their finances better. “It used to be ownership of current accounts that was king, now its ownership of data,” Ingram says.

Mobile app bank Monzo, which has some 500,000 users after a year of rapid expansion, believes the reforms could help it grow even faster this year. “If it works well it could help a start-up get five to 10 million users in a year. Of course we’d love that if it can be us,” Monzo founder Tom Blomfield says. “It’s an incredible opportunity.”

Forrester’s Morgan thinks Silicon Valley tech giants may also enter the fray. “Amazon is by far the biggest threat in our eyes,” he says. “They hold a lot of customer data and they are already providing loans to small businesses.”

The reforms have raised cybersecurity concerns

High street retailers and grocers are also likely beneficiaries, with chains queuing up to offer services like faster refunds by bank transfer and in-store access to balances.

Accenture research last month found a third of big UK retailers would be ready to plug in to banks by the time Open Banking launched, increasing to 90pc by 2019.

It would be premature to say the UK’s incumbent banks face an unstoppable wave of change.

Two thirds of consumers in a separate Accenture survey said they would not share their financial data with a third party come the launch of Open Banking. And more than half said they would never change how they banked.

Their reticence comes partly from security concerns after high-profile cyber attacks that have compromised both major companies and the data of other organisations, such as the NHS.

This week, consumer groups Which? and Get Safe Online warned that the Online Banking reforms could heighten the risk of customers falling prey to scams if they were not vigilant.

But Gulamhuseinwala insists that “security has been built at the heart of what we’re doing”.

Customers who want to take up a deal at a rival lender should be redirected to their existing bank’s website in order to give permission.

Behind the scenes your current bank would check the third party is authorised to access the data against a central register controlled by Open Banking.

This system would either block or approve the data transfer, then redirect you back to the competitor’s site if all was well.

“No customer has to use Open Banking and they will never be required to share their username and password with another bank,” Gulamhuseinwala adds.

Customers should be given the option to switch on or off permissions for third parties to access financial data held by their bank, similar to the permissions systems offered by most smartphones.

A customer redress system will also be offered by Open Banking should consumers have concerns their data has been compromised.

Monzo’s Blomfield describes data security as “massively” important. “It’s as important as the money, they are now basically equal,” he adds.

Simon Paris, deputy chief executive at financial infrastructure firm Finastra, which has been working with banks to prepare them for the changes, believes customers will quickly be won over.

“What people don’t realise is how wide-reaching the benefits of Open Banking may be,” Paris says.

“It has the potential to remove barriers and create completely frictionless movement between payment and account information, which could improve services from credit ratings to mortgage payments to utility bills.”

What’s clear is traditional banks can no longer afford to be complacent. They have a fight on their hands to keep customers loyal and must offer better deals. The ultimate winners should be consumers.